Cut in Core Earnings of Power Companies

Hong Kong’s electricity duopoly are bracing for a 30 per cent cut in core earnings as early as October, but a lower return rate does not necessarily mean consumers’ bills will drop accordingly.

CLP Holdings (SEHK: 0002) and Hongkong Electric (SEHK: 0006) Holdings will have the return of their earnings on electricity supply slashed to 9.99 per cent from 13.5-15 per cent return on net fixed assets in use, forgoing HK$5 billion in profits between them based on their 2006 audited profits, the government says.

As part of the new regulatory regime on the power utilities, the new return means their core earnings will be cut by 30 per cent from the 14.4 per cent return the two firms have earned on average in the past 10 years.

The government trumpeted that the new regime accomplished its three main missions – slashing the utilities’ return to a single digit, lowering emissions and paving the way for an open market.

CLP and Hongkong Electric also accept that their contract period will be shortened to 10 years from 15. The conclusion of 18 months of negotiations means a U-turn of the power firms’ ferocious opposition. “The deal is as good as they can get compared to what they are earning in developed countries like Australia and the UK,” said an analyst of a European brokerage who expected future returns to be 10 per cent.

“A 10 per cent return is perceived as very attractive in these countries, and the two companies obviously know this very well because they invest there,” he said.

Many analysts believe the deal is reasonable for the two electricity companies and clears up regulatory uncertainty. But academics and analysts believe power bills will not necessarily be reduced at the same rate, as the new regime continues to peg the utilities’ core earnings to capital investment in power generation, transmission and distribution.

One pointed out that the prevailing higher cost of fuel could offset a cut in the basic tariff, as consumers must pay for the cost of production despite the government’s forecast of a “double-digit” reduction next year.

CLP, which serves Kowloon, the New Territories and Lantau, will embark on the new regime in October and Hongkong Electric, which lights up Hong Kong and Lamma islands, in January next year.